How did last week work out for you? Personally, I think it was the most intense week I can remember since the crisis of 2008. On Tuesday night I sat and watched CNBC Asia the whole evening as my heart sank with the Japanese stock market. I remember being in a 6th grade history class when someone raised their hand and asked, “How come all of the history is the history books?” Looking back on the experience, it really was a reasonable question and speaks volumes to the lives most baby boomers have led.
If you were born in the late 50’s like I was, you became an adult in the late 70’s and were fortunate enough to go about your life in the 80’s, 90’s and 00’s. Life was fairly routine until 9/11. The world did change on that day but people went back on their merry way until the market peaked in 2007.
Now I look back on that period and realize how lucky we were to miss out on all that history. Why am I talking about this? It’s been over 100 years and they still talk about the San Francisco Earthquake and I’d be willing to bet they’ll be talking about the Japanese tragedy 100 years from now. Folks, we just had a jolt of instant history. Some of you realize it, but talking to the average Joe on the street, I’m not sure he does. I’m not the 6th grade history teacher but it does require a look back to gauge and understand what kind of market we may be dealing with.
I believe the market has shifted and we no longer are in the kind of market we were in for the past 2 years. Something happened a month ago when markets started dropping when Libyan crisis hit the headlines. I want to measure my words carefully because in a market like this it’s not the news event that counts as much as the reaction to the news event. I don’t believe news drives markets. It’s still the other way around. But let’s not forget the fact the SPX came to the long term median channel line we’ve discussed numerous times in this space. It’s absolutely amazing to me that an event like March 11 would materialize at a time the SPX is wrestling with piercing through the long term bear market channel. Not only do I think the channel lines are incredible magnets to the price action, they are also psychological dividing lines for the mood of the crowd. Since the pattern didn’t get through it’s important to take a step back and how the psychology has changed. Since the day after President’s Day this has been a market that has been dominated by fear. I will tell you this appears to be a different kind of market than the one we had in 2007. If you recall the top back then led to a period of nearly a year where the crowd was in denial about the housing crisis.
I don’t think we had euphoria in February. Do you? But markets started dropping on fear and rose on relief. That happened until last week where it did feel like the end of the world. I suppose a 9.0 quake, tsunami and potential nuclear meltdown should feel like the end of the world. But there is precedent for this market. Briefly, the market from 1938-42 was very similar. In August 1938 Hitler made his thoughts known to the world to gobble up Czechoslovakia. Markets started selling off. Markets continued selling off until such time that Chamberlain went to Berchtesgaden and signed the Munich Agreement. From the time markets started selling off until they bottomed Hitler went from making his intentions known to actually setting an October 1 deadline for the start of the war. When he set the deadline, panic selling in the market set in and by the time Chamberlain appeased the dictator markets had already gapped up.
Why am I telling you this? Because it was an example of instant history in the making where a leg down started on fear and it exponentially multiplied over the sequence. In case you are curious, that particular market rallied for about 5 weeks until another historical event known as Krystallnacht shook the world out of its denial. The market peaked for good within a day of the broken glass.
That’s the psychology, what is going on with the patterns? Above all else is the inverse relationship to the bond market. Others think equities and oil are going in opposite directions and I’m sure on certain days they are. However, the real challenge to equities is bonds and we have another week of data where the inverse relationship is in force. The chart shows a condition where the pattern has pierced out of the intermediate level bear channel. That being said, I didn’t expect bonds to collapse again and they didn’t. What they did do was break through that 6 week consolidation from December. I don’t think the stock market liked that one bit. Luckily, the pattern hit the 144 day window off the top so it is backing off. But you can see where support is and future fortunes of the equity market are going to be dependent on that pattern. My take coming into LAST WEEK was that the bonds would go sideways and it would be very difficult for the equity markets to gain traction to get a new leg in the bull. I didn’t know it would break through and one has to wonder if the Fed is the buyer again to finance the rescue efforts for Japan. The bottom line for me is the bond market has really good support just below where we closed last week.
That brings us to the G7 intervention last week. Normally, I don’t pay attention to such things. As far as the success of it goes, I think there is good news and bad news. I know, you want the bad news first. From the high in 1998, Lucas Wave International has been tracking the bottom in the USD-JPY and we’ve been looking for signs of a major square out in the 147th month. It didn’t happen. We are beyond month 147. So what’s the good news? This is the Spring Equinox which is that seasonal time of the year where changes in trend have a very good chance of materializing and sticking. Their timing, at least in the intermediate term is very good. As a matter of fact, the Spring Equinox and the Gann Master Timing Date (March 21) is the single most important day of the year for financial markets. What I am going to be watching is for clues to see how much juice the bulls actually have left. Right now, they are up to bat and the tide is in their favor. If everything that is materializing right now can’t get a rally going, this is going to be a very different kind of year. I’m not going to speak for 6 months or a year down the road but it’s now or never for the bulls in 2011.